. . . and hard questions about the economy

February 8, 1985

MOST Americans -- whatever their political persuasion -- would likely agree with President Reagan that there is justifiable reason for a sense of national ``pride'' regarding the past ``25 straight months of economic growth, the strongest in 34 years,'' which the President spoke of in his State of the Union address. Inflation is down from the double-digit rates of the late 1970s. Interest rates are dropping, although real interest rates -- adjusted for inflation -- remain at historically high levels. Unemployment is down from the early 1980s and more Americans are at work.

President Reagan, to his credit, surely deserves solid marks for articulating the overriding long-range economic objective of his administration: curbing (as a goal, at least) what had become an excessive federal role in the nation's economy. The Reagan message -- that the private marketplace of businesses and individuals can perform most efficiently when least directed or controlled from Washington -- was a necessary adjustment of the pendulum from the concentration of power that had occurred along the banks of the Potomac from 1933 down to the present.

But it is equally important that the reform be undertaken in such a manner that the economic and political pendulum not swing so far away from Washington as to work against the nation's continued well-being. Balance is essential. Is sharply curbing or gutting the social-service sector of government the same as ``reforming'' government or making it more efficient? Federal services exist because they meet certain human needs, or are not provided elsewhere in society, by states or cities, or by the private sector. And what about the massive defense buildup now under way? Is that not adding to the power and clout of big government, and in a very big way?

In this regard, several fundamental questions have to be asked about the President's economic agenda:

Mr. Reagan calls for a balanced-budget amendment. Even if Congress and the American people gave him one, would he be willing to slow the rate of increase in defense spending to help bring down federal deficits?

Mr. Reagan argues that economic growth -- which he says would be furthered by tax simplification -- is ``the best way to reduce deficits.'' But what about analysis by the highly respected Congressional Budget Office that the nation will not be able to grow its way out of the deficits? The CBO concludes that current White House assumptions about US economic growth are pegged too high. The White House, for example, predicts national growth of 4 percent a year annually through 1988, a rate of increase higher than that expected by most private economists or the CBO, which sees growth closer to the 3 percent range. The difference is not inconsequential. Slower growth means fewer new jobs, lower federal tax receipts, and, presumably, higher deficits.

Mr. Reagan had little to say about reducing deficits. Yet, the deficits work against the nation's economic prosperity by putting upward pressure on interest rates, making US exports less competitive vis-`a-vis overseas products, and boosting the percentage of the federal budget going for interest payments on the national debt. It is imperative that budget deficits be reduced.

Finally, what about Mr. Reagan's call for tax reform as a priority equal to deficit reduction? Tax simplification is a worthy goal. But coupling tax reform with deficit reduction seems unwise.

Congress would need to think through the offsetting effect of both plans very carefully to avoid canceling each other out. Mr. Reagan, for example, would end federal revenue sharing as a way of reducing deficits. But his administration's Treasury tax plan now calls for ending the deduction of state and local income taxes. If that happened, people in high tax states might be tempted to move elsewhere. And if that occurred at the same time that revenue sharing ended, the result could well be fiscal uncertainty at the state level.